Mutual fund investors may find terms like large cap, mid cap, small cap, and multi cap confusing when selecting a mutual fund. The markets and investment strategies vary by category. Multi-cap investing is particularly interesting because it brings large-, mid-, and small-cap companies together in the same fund.
A key aspect of this category is the 25-25-25 allocation requirement, which provides exposure to all three market-cap sizes. Knowing how this rule applies to an investor helps them understand what they are really getting for the category before deciding whether to invest.
What are multi-cap funds?
Multi cap funds are open-ended equity funds that pursue an investment strategy across large-cap, mid-cap and small-cap stocks. Under SEBI classification, at least 25% of assets must be invested in each of the three market-cap segments, with at least 75% of total assets invested in equity and equity-related instruments.
This gives investors access to businesses across all market-cap sizes in a single fund, rather than having to pick individual funds for each market-cap level. Diversification across market segments, however, will not remove equity-market risk. The investment value may also rise or fall depending on market conditions.
What exactly is the 25-25-25 rule?
This rule is easier to understand with an example. Assume that a fund has ₹1 Lakh to invest. At least ₹25,000 should be invested in large-cap companies, another ₹25,000 in mid-cap companies, and at least ₹25,000 in small-cap companies.
That brings up the amount of ₹75,000, which can be invested in the scheme, but can be further allocated as per the permitted investment strategy of the scheme up to ₹25,000. All four categories must not be exactly 25% at all times; only the minimum requirements apply to each category. The structure offers a certain degree of exposure, with some flexibility for the fund manager.
Why does each market-cap segment matter?
Large-cap companies are more established and offer exposure to more “mature” companies. A mid-cap company falls between large-cap and small-cap companies. They can provide exposure to businesses with growth potential but can be more volatile in share price.
Small-cap stocks are smaller in market cap, are volatile and fluctuate but offer higher growth opportunities. Any combination of the three forms a portfolio that spans various segments of the equity market.
What are the potential benefits of multi-cap funds?
The biggest advantage is diversification across market capitalisation within a single scheme. Investors don’t need to choose a large-, mid-, and small-cap fund to get exposure to all three segments.
The structure may allow the fund manager to identify market opportunities across different market segments while maintaining the required allocation. This can be a broad equity strategy for investors with long time horizons and a suitable risk tolerance. In the short term, however, equity schemes can be volatile and are usually suited to investors who can weather market ups and downs.
How can beginners invest in multi-cap funds?
The first step is to determine your financial objective and the time period for investing. Then check the investment goal, portfolio, risk level, expense ratio and past performance of a scheme under various market conditions.
Digital platforms make online investing more convenient by letting investors research funds, complete transactions, and monitor their holdings in one place. Convenience must not replace due diligence.
Are multi-cap funds suitable for every investor?
Not necessarily. They suit investors with different objectives, time horizons, and tolerance for equity market volatility.
Those with a long-term investing horizon and a moderate tolerance for risk may want to consider the category, whereas someone with a short-term investment need or low risk tolerance may want to determine whether the risk is appropriate.
Conclusion
The 25-25-25 rule offers a unique approach to multi-cap investing by providing exposure to large-, mid-, and small-cap companies. It can give exposure to the equity market in a wide range of securities, but with no elimination of market risk. Investors need to know about allocation, risk level, and investment period before deciding whether to invest in this category of investment products.
